The Xe Global Currency Outlook - May 2025

As global markets continue to react to geopolitical tensions, fiscal policy shifts, and evolving central bank decisions, May has brought a sharp pivot in sentiment across major currencies. The U.S. dollar (USD) remains under pressure, while fiscal stimulus in Europe and resilient domestic demand in select emerging markets are creating new dynamics in the global foreign exchange landscape.

Let’s take a look at what’s been driving the key currency movements this month and what could lie ahead.

USD: Weakness Persists as Growth Slows

The U.S. dollar extended its downward trend in April, weakening a further 8.5% year-to-date. The initial estimate of Q1 GDP showed a contraction of 0.3%, as businesses and consumers rushed to frontload imports ahead of new U.S. tariffs. This soft growth data, combined with an uncertain policy response from the Federal Reserve and a lack of clarity around job cuts and inflation control, has weighed heavily on USD sentiment. While concerns around the USD losing its status as a global reserve currency have emerged in some circles, these fears remain largely unfounded. The dollar still commands a 57.8% share of global currency reserves, well ahead of the euro and yen.

In the near term, expect the USD to consolidate its recent losses—with a continued bias toward mild depreciation.

EUR: Supported by Fiscal Stimulus and Capital Inflows

The euro (EUR) has been one of the strongest performers this spring, rising 10% over the past two months. A major tailwind has come from the European Union’s announcement of a €500 billion defense spending package—equivalent to 3.8% of Eurozone GDP. This fiscal push, alongside improved manufacturing data and capital inflows from the U.S., has fueled optimism for the euro.

Looking ahead, EUR/USD is likely to stabilize within the 1.1575 to 1.1200 range in May as markets digest the recent gains and the temporary 90-day pause on U.S. tariffs.

GBP: Gains Limited Despite USD Weakness

Sterling (GBP) rose to a multi-month high of 1.3424 against the USD in April but remains under pressure from weakening domestic data. Both the U.K. manufacturing and services PMIs declined in April, signaling broader economic cooling. However, with the Bank of England expected to cut rates at its May 8 meeting, further gains in GBP/USD may be capped.

The U.K. now faces the prospect of U.S. tariffs of 10–25% on a broad range of goods. These negotiations will be critical in shaping the pound’s direction over the coming months.

CAD: Steady Despite Trade Tensions

The Canadian dollar (CAD) held firm against the backdrop of rising U.S. protectionism. USD/CAD declined by 4% in April, supported by improving domestic sentiment and resilient export demand—even as U.S. tariffs weighed on Canadian manufacturing. However, economic headwinds remain. Canada’s unemployment rate rose to 6.7% in March, and the Bank of Canada is considering a rate cut in June. Further moves in USD/CAD will depend largely on progress in U.S.-Canada trade negotiations.

JPY: Gains Pause as the BoJ Holds Rates

The Japanese yen (JPY) pulled back in early May after a strong start to the year. The Bank of Japan left interest rates unchanged and downgraded its growth and inflation forecasts, prompting a modest reversal in USD/JPY.

While the long-term trajectory for the yen remains upward amid global uncertainty, the next move will likely be driven by bond market trends and risk sentiment.

CNY: Managed Stability Amid Rising Tariffs

China’s yuan (CNY) has remained relatively stable in recent months despite escalating U.S.-China trade tensions. Beijing continues to tightly manage the currency, even as economic activity slows and inflation remains in negative territory.

The PBoC is expected to ease monetary policy further in 2025, and while USD/CNY is likely to remain range-bound, the bias is toward the lower end of its recent range as the USD weakens.

AUD and NZD: Sensitive to Global Growth Headwinds

The Australian and New Zealand dollars remain closely linked to global economic health. The AUD fell sharply in April but rebounded as U.S. tariff escalation paused. However, uncertainty around future rate cuts from the RBA and concerns over China’s slowdown are limiting further upside.

The NZD similarly faced volatility, dropping to a five-year low before recovering on improved U.S. trade sentiment. With the RBNZ expected to cut rates again, the NZD may struggle to hold gains without stronger economic support.

MXN: Resilient Recovery Driven by Exports

Mexico’s peso (MXN) rebounded strongly in late April after a temporary surge in USD/MXN triggered by new U.S. tariffs. Mexico’s low unemployment, stable inflation, and ongoing trade negotiations with the U.S. have all helped restore confidence in the currency.

With nearly 76% of Mexican exports going to the U.S., further progress in trade talks will be crucial in sustaining MXN strength through Q2.

Looking Ahead

Key Themes to Watch in the Coming Months:

• Whether the USD continues its downward path amid slower growth and trade uncertainty

• How global central banks respond to softening inflation and weaker growth

• The market’s reaction to the 90-day pause on U.S. tariffs—and what happens if talks fail

• The durability of recent EUR and GBP strength if fiscal and monetary divergence deepens

As always, currency markets are dynamic—and May’s developments underscore the importance of staying informed. Xe remains committed to helping you navigate volatility with expert insights and real-time rates.

Stay updated on the latest movements at xe.com.

The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.